How Much Tax Do You Pay Under an Umbrella Company?

Paying Tax Under an Umbrella Company...

For many years, self-employed individuals could access favourable rates of tax by setting up a limited company and filing all their invoices, expenses and tax returns through it. However, the introduction of IR35 legislation into the public sector in April 2017 – and its expansion into the private sector in April 2020 – means that it will soon be significantly more difficult to achieve those same benefits. In fact, for many people, they may be liable to paying thousands of pounds more in tax from next year.

As a result, umbrella companies are becoming an increasingly attractive proposition for those who don’t want to be caught in the IR35 dragnet. Whether switching to an umbrella company at the request of your client, or contracting one of your own volition to avoid the eye-watering hike in tax and national insurance contributions (NICs) that the upcoming legislation will incur, it makes sense to get your facts straight with regard to how much tax you’ll soon pay.

Once signed up with an umbrella company, you’ll effectively becoming an employee of that firm in the eyes of HMRC. This means that how much tax the umbrella company deducts from your pay is calculated via pay as you earn (PAYE) – which is exactly the same way in which a permanent employee in any other industry meets their tax obligations. Here’s a breakdown of exactly what that means.

How much tax do you pay under an umbrella company?

When working as an employee of an umbrella company, tax payments, NICs, the umbrella company’s administration fee and any other contributions are all deducted from your wage slip each week or month, exactly as they would be for any other PAYE employee. Let’s look at each of those ideas in isolation to gain a better understanding of exactly what that will mean for you:

Income Tax

Forming the basis of your tax obligations, the amount of income tax you will pay is dependent upon your tax code and the part of the UK in which you reside. As of April 2020, your personal allowance (the threshold of earnings upon which no tax is payable) will rise to £12,500 for most people across the whole of Britain, but the rates for earnings above that will vary slightly depending upon your location.

In England, Northern Ireland and Wales, any earnings between £12,501 and £50,000 is taxed at 20%, while that between £50,001 and £150,000 will receive the higher rate of 40% and earnings above £150,001 will be taxed at the additional rate of 45%.

In Scotland, things are slightly more complicated with five tax bands. The starter rate of 19% is applicable on earnings between £12,501 and £14,549. The basic rate of 20% comes into effect between £14,550 and 24,944, rising to the intermediate rate of 21% at £24,945 to £43,430. The higher rate of 41% applies to earnings between £43,431 and £150,000, while the top rate of 46% affects all earnings above £150,001.

As with all PAYE employees, these contributions will be calculated by HMRC and deducted from your wage slip automatically by the umbrella company before you receive your salary.


As a self-employed contractor working for an umbrella company, tax is only one facet of your obligations to HMRC. NICs account for another big deduction from your pay packet and are split into two kinds – employer’s contributions and employee’s contributions.

Depending upon the nature of your arrangement with both the end client and the umbrella company, their employer contributions may well be deducted from the value of any invoices that are submitted through them. You will also be liable to pay employee’s NICs on top of those.

For the tax year 2019/20, employer’s contributions have been fixed at 13.8%, while employee contributions stand at 12%.

Other considerations

As well as income tax and NICs, it’s likely there will be a number of other deductions visible from your pay slip. Unless otherwise specified by the umbrella company, your holiday allowance is likely to be fixed at 12.08% (although some firms may insist that you take the annual leave instead).

Meanwhile, pension contributions are another scheme into which you will be automatically enrolled when you join the umbrella company (as per their legal obligations). However, this is an optional extra from which you can immediately unsubscribe (and receive a refund on any funds paid) if you wish.

Finally, you must also pay an administration fee to the umbrella company for their services. This will either take the form of a fixed weekly or monthly fee, or one that fluctuates as a percentage of your income. It is strongly advised that you steer clear of the latter arrangement, since the umbrella company will stand to benefit massively as your income rises without providing any additional services.

Be wary of higher net payumbrella companies

In an attempt to differentiate themselves from their rivals in a highly competitive market, some unscrupulous umbrella companies advertise the capability to achieve higher net take-home pay for their clients, with some firms claiming you will receive as much as 85% or even 90% of our overall income.

It’s very important that you do not involve yourself with these companies. How much tax an umbrella company must pay on behalf of its employees is exactly the same across the board and every contractor – regardless of their individual circumstances or arrangements – must operate according to PAYE regulations. Therefore, any companies advertising “higher net pay” rates are not compliant with HMRC legislation.

Unfortunately, in the event that you do enter into a contract with such a company and are subject to an investigation from HMRC, it is ultimately you who will be held accountable for the discrepancy. You are always deemed responsible for your own tax obligations, so ignorance is not an excuse in the event that an illegitimate umbrella company does not file your taxes correctly.

Find a trusted umbrella company

At Umbrella Supermarket, we make sure only the most reliable, trustworthy umbrella companies are listed on our site. Using our umbrella comparison tool, you can get quotes from these companies to see which is best for you, without having to worry about any non-compliance. It’s that simple.

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